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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998 OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-22361
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NET.B@NK, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-2224352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
950 NORTH POINT PARKWAY, SUITE 350 30005
ALPHARETTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 343-6006
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of such common equity as of March 8, 1999: $384,619,525
Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,598,495 shares of Common Stock at
March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held on April 22, 1999, are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Net.B@nk (the "Bank") is the largest federally-insured bank operating
exclusively on the Internet. Our mission is to profitably provide a broad range
of banking and financial services to the growing number of Internet users. Our
low-cost branchless business model has allowed us to attain profitability within
a year of acquiring our bank charter while continuing to pass along our
operating cost savings to customers in the form of attractive interest rates and
low fees. We strive to maintain high asset quality by employing conservative
credit policies. We plan to attract new accounts through national awareness of
the "Net.B@nk" brand name and to capitalize on increasing consumer use of the
Internet.
During 1998, the Bank's customer accounts grew from 4,755 to 17,408,
deposits grew from $58.7 million to $283.6 million and total assets grew from
$93.2 million to $388.4 million. We believe our growth is attributable to
increasing consumer use of the Internet and our ability to offer a broad array
of convenient, cost-effective, secure banking services to this growing customer
base.
INDUSTRY BACKGROUND
THE INTERNET
The Internet enables millions of people worldwide to access news and
information, communicate with each other and conduct business electronically.
According to International Data Corporation, the number of worldwide Internet
users is projected to grow from an estimated 97.3 million in 1998 to an
estimated 319.8 million by 2002. Additionally, Jupiter Communications estimates
that 27.4 million United States households were on-line (i.e., had access to the
Web, used a consumer on-line service or sent e-mail) in 1997 and that an
estimated 61.4 million households are expected to be on-line in 2002.
The Internet has become a significant marketplace for buying and selling
goods and services. International Data Corporation forecasts that total
worldwide commerce on the Internet will grow from an estimated $32.4 billion in
1997 to an estimated $425.7 billion in 2002. With the emergence of the Internet
as a globally accessible, fully interactive medium, many companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly using electronic commerce. Many consumers are showing
strong preferences for transacting certain types of business, such as paying
bills, booking airline tickets, trading securities and purchasing consumer
products, electronically rather than in person or over the telephone.
Individuals can now conduct these transactions virtually anywhere at any time.
Many consumers have accepted and even welcomed self-directed on-line
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial services. Many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet,
and finance-related Web sites continue to grow in popularity.
ELECTRONIC BANKING
The increasing levels of commerce transacted on the Internet has prompted
the development of electronic banking delivery systems. These forms of
electronic delivery systems provide convenience for customers and allow
financial institutions to lower their overhead costs. The two types of
electronic banking currently available, PC-based home banking and Internet
banking, are very different. The characteristics of each are as follows:
- PC-BASED HOME BANKING. PC-based home banking requires PC-based financial
services software products such as Intuit's QUICKEN, Microsoft's MONEY or
a bank's proprietary software. Each product carries its own set of
instructions that the customer must learn before commencing any banking
transactions. The software resides on the customer's PC along with his or
her account data and
requires a dial-up modem and manual downloading. Consequently, customers
must conduct PC-based home banking from the PC containing the customer's
software and account data. Customers generally must back up their account
data at frequent intervals to counteract the risk of losing data. Because
the customer must connect with the financial institution via modem and
download his or her account data, real-time transactions are not generally
possible.
- INTERNET BANKING. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for access to the Internet and the financial
institution. Internet banking requires no particular software and does not
restrict the customer's operations to the location of his or her PC.
Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills or transacts other
business on a real-time basis. Account data remains stored on the bank's
secure server at all times, protected by technology designed specifically
to safeguard such information. No downloading or back-up is required, as
the bank's server backs up all data and transactions on a continuous
basis. With Internet banking, the information presented to the customer
remains current at all times.
The use of electronic banking delivery systems, and particularly Internet
banking, is growing as consumers find that electronic banking is both convenient
and cost-effective. According to Jupiter Communications, the number of on-line
banking households in the United States is projected to grow from an estimated
4.5 million in 1997 to an estimated 17.1 million in 2002. Jupiter Communications
further indicates that the percentage of these on-line banking households
utilizing Internet banking is projected to rise from an estimated 8% in 1996 to
an estimated 80% in 2000.
Demographic surveys indicate that Internet users represent an ideal target
market for Internet banking. Recent studies by Jupiter Communications revealed
that, in the United States, approximately 49% of Internet users are college
graduates and that approximately 30% are engaged in professional or managerial
occupations. The survey also indicated that the median age of Internet users is
33, that approximately 61% of Internet users are under the age of 45 and that
the average annual income of an Internet user is over $60,000. The attractive
demographics of Internet users facilitate the growth of Internet banking.
Internet users tend to be young and mobile and thus comfortable with and
receptive to the convenience of on-line commercial transactions. We believe that
as Internet users enter their prime earnings and savings years, there will be an
increased demand for high-yielding savings products. Additionally, Internet
users tend to be professionals with limited amounts of discretionary time and
are attracted to the convenience of "one-stop shopping" for a full range of
financial services.
THE NET.B@NK SOLUTION
As the first federally-insured bank to operate solely on the Internet, the
Bank believes it has a competitive advantage relative to on-line banks with a
less established operating history. In addition, the Bank believes it has a
competitive cost advantage over traditional banks. We also believe our
established position in the marketplace provides us with a competitive advantage
in view of the lead time required for potential competitors to start an Internet
bank. We intend to continue to capitalize on this advantage by aggressively
seeking new customers in order to further build market share.
Net.B@nk's customer demographics parallel those of the general Internet
population and illustrate the Bank's appeal to households with relatively high
incomes. According to John H. Harland Company, as of September 1998, Net.B@nk's
customers had an average age of 44 and a median annual household income in
excess of $50,000. Net.B@nk is ideally positioned to participate in the rapid
growth of the Internet and on-line banking based on its:
- ATTRACTIVE INTEREST RATES AND LOW FEES. The Bank's operating costs are
generally lower than those of traditional "bricks and mortar" banks
because it does not require a traditional branch network to generate
deposits and conduct operations. The Bank passes its savings in operating
costs on to customers by offering attractive interest rates and low fees
in order to generate deposits without
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sacrificing profit margins. We believe the Bank's unique business model
differentiates it from traditional banks offering Internet banking
services because they frequently offset the incremental expense of their
Internet banking services by charging additional fees.
- CONVENIENCE AND EASE OF ACCESS. We believe the Bank provides customers
with a higher level of convenience than can be achieved in a traditional
bank branch or through PC-based home banking. The Internet allows our
customers to conduct banking activities on a real-time, 7-day-a-week,
24-hour-a-day basis from any PC, wherever located, using a secure Web
browser. In addition, the Bank's Web site and electronic banking software
are designed to be user-friendly and to expedite customer transactions
with the Bank.
- BROAD SELECTION OF PRODUCTS AND SERVICES. The Bank offers a broad array of
products and services that customers would typically expect from a
traditional bank. These products and services include checking and money
market accounts, certificates of deposit, electronic bill paying, debit
cards, credit cards, mortgage loans, business equipment leases and
securities brokerage services. We intend to continue to develop additional
products and services such as insurance products, consolidated account
statements, home equity loans and home equity lines of credit.
- HIGH-QUALITY SERVICE AND CUSTOMER SATISFACTION. We continually seek ways
to enhance customer satisfaction. For example, unlike many other banks, we
offer services such as electronic bill payment and ATM cards without
service charges. We also emphasize responsive, courteous customer service
and employ a staff of approximately 20 customer service representatives
(representing approximately 50% of our employees) and five temporary
employees who respond to inquiries from existing and potential customers
and process new accounts. Customers can access account data and
information regarding products and services 24 hours a day and can
currently reach our customer service representatives 18 hours a day by
telephone or e-mail. At present, we are reviewing plans to expand our
customer service hours. We strive for the highest level of customer
satisfaction and believe the significant growth in our customer base
illustrates our ability to meet our customers' needs.
- ADVANCED SECURITY. A significant barrier to on-line financial transactions
has been the secure transmission of confidential information over public
networks. The Bank uses sophisticated technology to provide what we
believe to be among the most advanced security measures currently
available in the Internet banking industry. All banking transactions are
encrypted and all transactions are routed from the Internet server through
a "firewall" that limits access to the Bank server. The Bank's systems
automatically detect attempts by third parties to access other users'
accounts and feature a high degree of physical security, secure modem
access, service continuity and transaction monitoring. See "--Security."
GROWTH STRATEGY
Our objective is to become the leading provider of a full range of on-line
financial services. We intend to accomplish this objective by implementing the
following strategies:
- BUILD NATIONAL BRAND AWARENESS THROUGH INCREASED MARKETING EFFORTS. We are
significantly expanding our marketing program and are working with
nationally known advertising and public relations agencies to build
national awareness of the "Net.B@nk" name through a variety of marketing
initiatives. These initiatives include expanding our advertising media to
include print and direct mail campaigns; continued advertisement on
targeted portals such as Yahoo!, Infoseek and Excite and Web sites such as
Bank Rate Monitor, Motley Fool and Money.com; and continued pursuit of
strategic alliances with other Internet financial services providers. To
fund these initiatives, the Company has increased its marketing expenses
from approximately $695,000 for 1998 to a budgeted $3.6 million for 1999.
By increasing our marketing efforts, we believe that we can expand brand
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awareness of the Bank on a national scale and significantly increase our
customer base. See "-- Marketing."
- LEVERAGE LOW COST STRUCTURE. The Bank's operating costs are generally
lower than those of traditional "bricks and mortar" banks because it does
not require a traditional branch network to generate deposits and conduct
operations. This is demonstrated by the Bank's low ratio of 1998
noninterest expense to average earning assets of 2.1% as compared to 4.4%
for commercial banks with $300 million to $500 million in assets (based on
data provided by FDIC Institution Directory). Additionally, the Bank's
ratio of total assets per employee was $13.9 million as of December 31,
1998 as compared to $2.4 million for commercial banks with $300 million to
$500 million in assets (based on data provided by FDIC Institution
Directory). The Bank passes its operating cost savings on to customers by
offering more attractive interest rates on deposit accounts and lower fees
than those offered generally by traditional banks. We believe this
strategy attracts deposits without sacrificing profit margins. We intend
to continue to leverage the fixed-cost aspect of our branchless business
model to enhance profitability.
- OFFER A BROAD ARRAY OF PRODUCTS AND SERVICES. Our objective is to attract
customers seeking to combine the convenience of Internet banking with the
broad array of products and services typically offered by traditional
banks. Toward this end, the Bank's product and service offerings include
checking and money market accounts, certificates of deposit, electronic
bill paying, debit cards, credit cards, mortgage loans, business equipment
leases and securities brokerage services. We intend to continue to develop
additional products and services such as insurance products, consolidated
account statements, home equity loans and home equity lines of credit. See
"--Products and Services."
- GENERATE NONINTEREST INCOME THROUGH CROSS-MARKETING INITIATIVES. To
generate additional noninterest income and enhance customer loyalty, the
Bank cross-markets a variety of non-deposit products. We offer credit
cards, mortgage loans, business equipment leases, securities brokerage
services and other noninterest income-generating products to existing and
potential depositors through various marketing techniques, such as our Web
site, e-mail, on-line advertising and telemarketing. This strategy enables
the Bank to generate additional earning assets and fee income from a
growing customer base.
- MAINTAIN HIGH ASSET QUALITY. The Bank's loan portfolio strategy is to
maintain a conservative loan mix consisting of home mortgage, home equity,
consumer and construction loans with an emphasis on high credit quality.
At the Bank's current stage of development, it is more cost-effective for
the Bank to purchase most of its loans or act as a participating lender
with other banks rather than originating its own loans. This decreases the
Bank's expenses and allows the Bank to reduce its loan loss exposure by
diversifying its portfolio. The Bank also emphasizes a conservative
securities investment strategy by investing in fixed income securities
such as United States Treasury obligations, collateralized mortgage
obligations and mortgage-backed securities issued by agencies such as
Fannie Mae and Freddie Mac. See "--Lending and Investment Activities."
- OUTSOURCE OPERATIONAL FUNCTIONS. To enhance the flexibility and
scalability of its operations, the Bank outsources its principal
operational functions to leading service providers such as NCR Corporation
("NCR"), The BISYS Group, Inc. ("BISYS") and CheckFree Corporation
("CheckFree"). NCR provides a secure server for the electronic banking
software licensed to the Bank by Edify Corporation ("Edify"). CheckFree
provides electronic bill paying systems for the Bank and BISYS processes
the Bank's transactions and interfaces with NCR's secure server. In each
of these relationships, the Bank benefits from the service provider's
expertise and economies of scale while retaining the flexibility to take
advantage of changes in available technology without affecting customer
service. The Bank can also respond easily to growth because these
third-party service
4
providers have the capacity to process a high volume of transactions. See
"--Operations-Service Providers."
PRODUCTS AND SERVICES
DEPOSIT PRODUCTS AND SERVICES. The Bank offers a variety of deposit
products at attractive interest rates in order to build its customer base. The
Bank is able to offer attractive interest rates as a result of its low operating
costs. It also attracts customers by offering convenient services such as free
electronic bill payment, overdraft protection and ATM cards. The Bank's deposit
products and services include:
- DEPOSIT PRODUCTS. The Bank offers two types of interest-bearing checking
accounts, a money market account and 6-, 12- and 30-month certificates of
deposit. The Bank has consistently offered interest rates on its deposit
accounts that are higher than the national average.
- BILL PAYMENT SERVICE. Through services provided by CheckFree, customers
can pay their bills on-line through electronic funds transfer or a written
draft prepared and sent to the creditor. The Bank does not charge a fee
for this service.
- OVERDRAFT PROTECTION. Overdraft protection is available to all interest
checking customers who qualify. Customers with interest checking accounts
may apply for overdraft protection on-line for amounts up to $5,000. If a
customer has both a money market and an interest checking account, the
Bank automatically establishes overdraft protection between those
accounts.
- ATM CARDS. Each customer automatically receives an ATM card when he or she
opens an account. Customers can access their accounts at ATMs affiliated
with the Cirrus, Honor and Avail networks. The Bank does not charge its
own fee for ATM usage, but fees are generally imposed by the operator of
the ATM.
LENDING PROGRAMS. To generate fee income and provide a convenient service
to its customers, the Bank offers on-line loans and credit cards as described
below.
- MORTGAGE LOANS. The Bank's Web site enables customers to obtain interest
rate quotes and apply for mortgage loans on-line. The Bank has an
agreement with First Mortgage Network ("FMN"), whereby the Bank acts as a
loan originator on behalf of FMN. The Bank has similar agreements with
E-loan, Inc. ("E-loan") and Fidelity Mortgage Services, Inc. ("Fidelity")
pursuant to which they forward mortgage applications to the Bank.
Applications received directly through the Bank's Web site are processed
and closed by FMN. Applications received indirectly from either FMN,
E-loan, or Fidelity are processed by such lender, which receives funding
from the Bank and closes the loans. The Bank funds each loan that meets
its underwriting criteria and sells the loans received directly through
the Bank's Web site to FMN or, in the case of loans received indirectly,
to the lender from which it was received, in each case with the servicing
released. The loans are presold to the same sources at the time of closing
so that the Bank does not bear any material risk of loss. The Bank
generally carries loans receivable on its books for an average of
approximately 30 days while it is awaiting receipt of sale proceeds.
During this time, the Bank receives interest on the outstanding balance at
the rate stated in the mortgage note. The Bank receives a portion of the
loan origination fee for providing these funding services. We plan to
expand the Bank's loan offerings to include home equity loans, home equity
lines of credit and automobile loans. We also offer home mortgage loans
that the Bank originates and retains for its own portfolio. See "--Lending
and Investment Activities."
- CREDIT CARDS. The Bank offers its customers Visa-Registered Trademark- and
MasterCard-Registered Trademark- credit cards issued by The Bankers Bank
for no annual fee. The Bankers Bank carries the credit card loans on its
books and the Bank has an income-sharing arrangement with The Bankers
Bank. Customers can apply for these credit cards on-line. The cards
prominently display the "Net.B@nk" logo with the Visa or MasterCard emblem
appearing in the lower right corner of the card.
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NON-BANKING FINANCIAL SERVICES. To serve as a single convenient source for
the financial services needs of Internet users and to generate additional
noninterest income, the Bank offers a full range of non-banking financial
services designed to attract and retain customers. These services currently
include securities brokerage and business equipment leasing services and in the
future will include several new services such as insurance products.
- SECURITIES BROKERAGE SERVICES. The Bank has contracted with UVEST
Investment Services ("UVEST"), a discount brokerage service, to provide
its customers with access to a full line of financial services and
investment products. The Bank has a fee-sharing agreement with UVEST
Customers can purchase securities without writing checks to their brokers,
as trading fees are automatically deducted from their checking or money
market accounts with the Bank. Investment proceeds are automatically
deposited into the customer's deposit account with the Bank. Customers
enjoy 24-hour on-line access, real-time quotes, low commissions and a
professional brokerage staff.
- BUSINESS EQUIPMENT LEASING. In October 1998, the Bank entered into an
agreement with Republic Leasing Company ("Republic") that allows the
Bank's customers, many of whom are independent business owners or
managers, to lease small business equipment through Republic. The Company
has a fee sharing agreement with Republic. Leases range in amounts from
$5,000 to $500,000 and cover virtually all types of business equipment.
Republic provides advice, comparison quotes and immediate equipment lease
financing and holds and services all of its leases.
FUTURE PRODUCTS AND SERVICES. To generate additional interest and fee
income and enhance customer convenience, the Bank plans to introduce in the
future a variety of new products and services. These products and services may
include insurance products, home equity loans, home equity lines of credit, a
proprietary credit card, consolidated account statements, financial planning and
asset allocation services and a system that will allow customers to download
their personal financial account data directly into commercial financial
services software.
LENDING AND INVESTMENT ACTIVITIES
The Bank's loan portfolio strategy is to maintain a conservative loan mix
consisting of home mortgage, home equity, consumer and construction loans with
an emphasis on high credit quality. At the Bank's current stage of development,
it is more cost-effective for the Bank to purchase most of its loans or act as a
participating lender with other banks rather than originating its own loans.
This decreases the Bank's expenses and allows the Bank to reduce its loan loss
exposure by diversifying its portfolio. As it grows, the Bank will continue to
develop its portfolio through purchases, participations and originations.
The Bank builds its loan portfolio in the following ways:
- PURCHASES. The Bank acquires most of its loans by purchasing packages of
specific types of loans, such as mortgage, home equity and consumer loans,
with each package consisting of loans with similar principal amounts,
interest rates and asset quality. The Bank also purchases portions of
commercial loan pools, with the seller retaining a portion of the loans to
decrease the Bank's risk. As of December 31, 1998, purchased loans
accounted for approximately $240.9 million, or 86%, of the Bank's loan
portfolio.
- PARTICIPATIONS. The Bank acts as a participating lender in commercial and
large construction loans with varying banks in the Southeast, including
The Bankers Bank. We anticipate expanding our participations in
construction loans to include loans originated nationwide in order to take
advantage of lower prices for these loans in less competitive geographic
areas. As of December 31, 1998, participations accounted for approximately
$36.9 million, or 13%, of the Bank's loan portfolio.
- DIRECT ORIGINATION. The Bank originates a small number of loans directly
with its customers. As of December 31, 1998, these loans accounted for
approximately $2.6 million, or one percent, of the Bank's loan portfolio.
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In addition, as described in "--Products and Services--Lending
Programs--Mortgage Loans," the Bank has an agreement with FMN whereby the Bank
acts as a loan originator on behalf of FMN and has similar agreements with
E-loan and Fidelity. From May 1998, when the Bank began providing services under
these agreements, to December 31, 1998, the Bank funded $142.1 million of loans
for third parties. As of December 31, 1998, the Bank had $23.2 million in loan
sale proceeds receivable relating to these agreements. In the future, the Bank
may retain a portion of such loans for its own portfolio.
The Bank's loan committee establishes underwriting standards and criteria
for the Bank's loan portfolio and monitors the portfolio on an ongoing basis.
The loan committee applies the same underwriting standards to all of the Bank's
loans, regardless of how they are originated. The Bank has also retained an
outside consulting firm to assist the loan committee in its review of the loan
portfolio and to conduct due diligence on purchased loans.
In addition to loans, the Bank invests deposit funds in various fixed income
securities. Our philosophy of high credit quality also guides our investment
decisions. The Bank's fixed income securities portfolio is comprised primarily
of United States Treasury obligations, collateralized mortgage obligations and
mortgage-backed securities issued by agencies such as Fannie Mae and Freddie
Mac.
MARKETING
Our marketing strategy is aimed at making Net.B@nk the leading brand in the
Internet financial services market. Our marketing strategy is designed to grow
our customer base and includes targeted advertising on the Internet and other
media, developing strategic partnerships that will enhance our product and
service offerings and fostering public relations. We currently market the Bank's
products and services by placing banner ads on portals such as Yahoo!, Infoseek
and Excite and Web sites such as Bank Rate Monitor, Motley Fool and Money.com
that we believe will attract the Bank's target customers. The Bank also derives
a marketing benefit from media coverage that the Bank generates through its
public relations campaign. We believe such coverage increases the general
public's awareness of the Bank and attracts new customers. In addition to these
advertising and public relations activities, we continually seek to form product
and marketing alliances with other Internet financial services providers such as
E-loan, Republic and UVEST to broaden our product and service offerings and
appeal to a broader customer base.
We are currently expanding our marketing strategies to extend beyond our
on-line advertising and public relations campaigns. New initiatives will include
print advertisements in publications aimed at our target customers and potential
strategic partners, direct mail marketing, co-branded credit cards and other
strategic partnerships with Internet financial services providers. We plan to
allocate the majority of our advertising budget to on-line advertising because
we believe it is a rapidly growing medium that best reaches our target audience.
We also plan to increase our cross-marketing initiatives to existing customers.
We realize that our new marketing strategy will require a significant
investment of resources and a commitment to pursue new marketing relationships.
Toward this end, we have increased our marketing expenses from approximately
$695,000 for 1998 to a budgeted $3.6 million for 1999. We plan to hire
additional marketing support staff and believe that a significant increase in
our investment in marketing initiatives will enable the Bank to increase its
name recognition and grow its customer and deposit base on a national scale.
COMPETITION
We believe that the principal competitive factors in the banking industry
are market presence, customer service, convenience, interest rates and product
offerings. While the banking industry is highly competitive, we believe we
compete effectively with our principal competitors, which are traditional banks,
Internet banks and other financial services providers. We believe the Bank's low
cost structure, which allows it to offer attractive interest rates and low fees,
gives it a competitive advantage over traditional
7
banks, which must support a physical branch structure. We also believe the
Bank's operating history and name recognition give it an advantage over other
independent Internet banks, which are still in the early stages of operation.
Furthermore, the Bank is able to offer a broader array of products and services
than many non-bank financial services providers. However, most of the Bank's
competitors have larger customer bases, greater name recognition and brand
awareness, greater financial and other resources and longer operating histories
than the Bank. Additionally, new competitors and competitive factors are likely
to emerge, particularly in view of the rapid development of Internet commerce.
OPERATIONS
ACCOUNT ACTIVITY. Customers can access the Bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access the Bank's service menu, they can open a new account, review the status
of an existing account or engage in a transaction. To open a new account, the
customer completes the on-line enrollment form on the Bank's Web site, prints
the signature card, signs it and mails it to the Bank. Customers can make
deposits into an open account at the Bank via direct deposit programs, by
transferring funds between accounts at the Bank, by wire transfer, by mail or in
person at the Bank's principal executive offices. No teller line is maintained,
however, and the Bank does not have or intend to establish a physical branch
system. Customers can also make withdrawals and have access to their accounts at
ATMs that are affiliated with the Cirrus, Honor and Avail networks, which
provides added customer convenience. Customers can apply for loans, review
account activity, enter transactions into an on-line account register, pay bills
electronically, conduct brokerage transactions, receive statements by mail and
print bank statement reports from any PC with a secure Web browser, regardless
of its location.
SERVICE PROVIDERS. We have negotiated relationships with a select group of
service providers who not only provide the Bank with significant quality,
security, reliability, performance and marketing capabilities, but also play an
integral role in implementing the Bank's full financial services strategy.
Because it outsources its principal operational functions to experienced
third-party service providers that have the capacity to process a high volume of
transactions, the Bank can respond easily to growth. Moreover, we have preserved
a degree of flexibility that enables us to assess and evaluate our product
offerings and delivery structure on an ongoing basis and to incorporate other
alliance opportunities as they present themselves. Should any of these
relationships terminate, however, we believe we could secure the required
services from an alternative source without material interruption of the Bank's
operations. Our principal service providers are described below:
- NCR. NCR provides operational support for the Bank's Internet banking and
bill payment applications. Specifically, NCR provides a secure Web site,
software that performs services relating to the Bank's infrastructure and
other electronic banking services. NCR also hosts Edify's electronic
banking software on its secure server and provides the interface necessary
to link the Bank's servers with those used by BISYS and CheckFree.
- BISYS. The Bank receives core systems processing services, such as deposit
account, loan and year-end processing services, from BISYS. The BISYS
server interfaces with NCR's secure server and verifies customer passwords
and identification. BISYS also operates the Bank's ATM and debit card
systems.
- EDIFY. Edify licenses its Electronic Banking System and Electronic
Workforce software, a suite of Internet banking applications, to the Bank.
Edify also maintains the software and provides consulting services as
needed.
- CHECKFREE. CheckFree provides electronic bill paying services to the
Bank's customers. Customers can pay their bills on-line through electronic
funds transfer or a written draft prepared and sent to the creditor.
8
- UVEST. UVEST provides discount brokerage services to the Bank's customers.
UVEST executes the trades and receives a commission that is automatically
deducted from the customer's deposit account. The Bank also charges
customers an account fee and an additional fee for each stock trade.
- FIRST MORTGAGE NETWORK. FMN processes mortgage loan applications submitted
through the Bank's Web site. It reviews the application, contacts the
customer and closes the loan for the Bank.
SECURITY
The Bank's ability to provide its customers with secure financial services
over the Internet is of paramount importance. Management continually evaluates
the Internet systems, services and software used in the Bank's operations to
ensure that they meet the highest standards of security. The following are among
the security measures that are in place:
ENCRYPTED TRANSACTIONS. All banking transactions and Internet
communications are encrypted so that sensitive information is not transmitted
over the Internet in a form that can be read or easily deciphered. Encryption of
Internet communications is accomplished through the use of the Netscape Secure
Sockets Layer ("SSL") technology. SSL is the standard for encryption on the
Internet and is currently used by Netscape's NAVIGATOR (Version 2.0 or higher)
and Microsoft's INTERNET EXPLORER (Version 3.0 or higher). Messages between the
Bank server and BISYS are encrypted using DES encryption, which is described in
"--Isolated Bank Server" below.
SECURE LOGON. To eliminate the possibility that a third party may download
the Bank's or a customer's password file, user identification and passwords are
not stored on the Internet or the Web server. Furthermore, passwords are strings
of six to eight alpha-numeric characters, which makes the chance that a password
can be randomly guessed less than one in one trillion.
ISOLATED BANK SERVER. The computer used to provide the Bank's services
cannot be accessed directly through the Internet. It is on a private connection,
or intranet, that provides two-way communication between the isolated bank
server and the NCR Internet Server. Consequently, an Internet user cannot
directly access the computer that actually provides the Bank's services.
All banking services are routed from the NCR server through a firewall. The
firewall is a combined software and hardware product that precisely defines,
controls and limits the access to "internal" computers from "outside" computers
across a network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the network. In other words, the
firewall is a mechanism used to protect the Bank server from the freely
accessible Internet. Furthermore, all messages sent or received between the NCR
server and the Bank server are encrypted using DES encryption. This is a
symmetric key algorithm and is highly secure because it is not susceptible to
standard ciphertext attacks. Thus, even if a perpetrator were able to route a
message to the Bank server through the firewall, the message could not be
encrypted in a way that would be considered valid by the server. As a result,
the Bank server would reject the message.
AUTHENTICATED SESSION INTEGRITY. An authenticated user is any user who
signs onto the Bank site with a valid user ID and password. Although the vast
majority of authenticated users are legitimate bank customers, the Bank server
is programmed to limit exposure to an authenticated user who is attempting to
defraud the Bank. If the authenticated user alters the URL (the command or
request that is sent from the browser to the server) in any way in an attempt to
gain access to other users' accounts, the Bank server immediately detects that
the session integrity variables have been violated. The Bank server will
immediately stop the session and record the attempt in a log so that the Bank's
staff can investigate.
9
PHYSICAL SECURITY. All servers and network computers reside in secure NCR
facilities. Currently, computer operations supporting the Bank's Internet access
are based in Columbia, Maryland with backup facilities in Dayton, Ohio. Only
employees with proper photographic identification may enter the primary
building. The computer operations are located in a secure area, with admission
only by key card. Access to the bank server console requires further password
identification.
SECURE MODEM ACCESS. The Bank server and BISYS are connected by a private
line that is not accessible from the public network. The Bank server is
connected to CheckFree by a similar private connection. A dial-up maintenance
port also permits access to the Bank server, The modem that provides the only
access to this port is specially protected and is only enabled on an as-needed
basis.
SERVICE CONTINUITY. NCR and BISYS each provide a fully redundant network
with no single point of failure. The Bank server is also "mirrored" so that
hardware failures or software bugs should cause no more than a few minutes of
service outage. "Mirroring" means that the Bank server is backed up continuously
so that all data is stored in two physical locations. This network and server
redundancy ensures that access to the Bank will be reliable. However, if
customers are not able to access the Bank over the Internet, customers will
retain access to their funds through several means, including paper checks, ATM
cards, customer service and an automated telephone response system.
MONITORING. All customer transactions on the Bank server in BISYS and in
CheckFree produce one or more entries into transactional logs. NCR and the Bank
recognize that it is critical to monitor these logs for unusual or fraudulent
activity. As mentioned previously, any attempt by an authenticated user to
modify the command or request that is sent from the browser to the server will
be logged. Additionally, all financial transactions will be logged. Bank
personnel review these logs regularly, and any abnormal or unusual activity will
be noted and appropriate action will be taken either by the Bank, NCR or both.
Ultimately, vigilant monitoring is the best defense against fraud.
The preceding security measures are designed to ensure that the Bank is set
up in a secure manner. However, over the long term, the security of the Bank
depends upon the procedures and standards used for administration of the
Internet site. Both NCR and BISYS are required to obtain SAS 70 certification
from a national accounting firm. This is a certification by independent auditors
that the NCR and BISYS computer systems are being managed and operated in a
manner consistent with accepted practices. Both BISYS and NCR have received this
certification.
We believe the risk of fraud presented by Internet banking is not materially
different from the risk of fraud inherent in any banking relationship. We
believe the three principal reasons for a breach in bank security are: (i)
misappropriation from the user of the user's account number or password, (ii)
penetration of the bank's server by an outside "hacker" and (iii) fraud
committed by an employee of the bank or one of its service providers. Both
traditional banks and Internet banks are vulnerable to these types of fraud. By
establishing the security measures described above, we believe the Bank has
reduced its vulnerability to the first two types of fraud. To counteract fraud
by employees, associates and consultants, we have established internal
procedures and policies designed to ensure that, as in any bank, proper control
and supervision is exercised over employees, associates and consultants. We also
counteract all types of fraud through daily examination of the Bank's
transactional logs.
SUPERVISION AND REGULATION
BACKGROUND
In connection with its approval of the acquisition of our bank charter on
July 31, 1997, the Office of Thrift Supervision (the "OTS") required Net.B@nk,
Inc. (the "Company") to make certain commitments with respect to its ongoing
operations. These commitments included: (i) to receive prior OTS approval of any
proposed change of senior management or directors for a period of three years,
(ii) to operate within the parameters of the Company's business plan as
submitted to the OTS, (iii) to obtain from an
10
independent computer security specialist an independent review of, and written
report regarding, the Internet banking security measures employed by the
Company, (iv) to comply with the OTS policy statement regarding on-line banking,
(v) to ensure that the Company's directors and certain executive officers and
shareholders refrain from disposing of their restricted shares of Common Stock
without the prior consent of the OTS until July 28, 2000, (vi) to obtain the
approval of the Regional Director of the OTS with respect to any changes in the
Company's stock benefit plans effected on or before July 28, 2000, (vii) to
comply with OTS directives, if any, to require the exercise or forfeiture of
participants' rights under the Company's stock benefit plans in the event the
Bank's capital falls below minimum OTS requirements and (viii) to submit to the
OTS a structured project plan describing the steps and timing required to
replace the Web hosting services that were previously provided by AT&T Corp. and
are now provided by NCR. The Company and its directors, executive officers and
shareholders have complied with these conditions to date. On January 8, 1999,
the OTS granted Carolina First permission to sell a portion of its shares of
Common Stock in the Company's February 1999 secondary public offering. As a
condition to its approval, the OTS required that two of the four directors
initially nominated by Carolina First resign following completion of the
offering and that those directors be replaced with two outside directors within
six months of such resignations. The OTS also requires Carolina First's
continued compliance with the condition described in clause (v) above with
respect to its remaining shares of Common Stock. We do not believe that these
commitments materially affect the Bank's operations.
Carolina First currently owns more than five percent of the Company's
outstanding Common Stock. As a result, Carolina First is subject to certain
Federal Reserve Board regulations regarding its relationship with the Company.
Consequently, until the earlier of the date that Carolina First owns less than
five percent of the Company's outstanding Common Stock or July 28, 2000, the
Company will not engage in any activities that are not permissible under
applicable Federal Reserve Board regulations.
Savings and loan holding companies and federal savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect the Company and the Bank.
This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referred to below and is not intended to be
an exhaustive description of the statutes or regulations applicable to the
business of the Company and the Bank. Supervision, regulation and examination of
the Company and the Bank by the regulatory agencies are intended primarily for
the protection of depositors of the Bank rather than shareholders of the
Company. The terms bank, savings institution, savings association, federal
savings bank and thrift are used interchangeably in this section to refer to
savings associations such as the Bank that are subject to supervision and
regulation by the OTS.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
The Company is registered as a holding company under both the Savings and
Loan Holding Company Act (the "SLHCA") set forth in Section 10 of the Home
Owners Loan Act ("HOLA") and the Financial Institutions Code of Georgia
("FICG"). The Company is currently regulated under such acts by the OTS and by
the Georgia Department of Banking and Finance (the "Georgia Department"),
respectively. As a savings and loan holding company, the Company is required to
file with the OTS an annual report and such additional information as the OTS
may require pursuant to the SLHCA. The OTS also has authority to conduct, and in
fact conducts, examinations of the Company and each of its subsidiaries.
Savings and loan holding companies and their subsidiaries are prohibited
from engaging in any activity or rendering any services for or on behalf of
their savings institution subsidiaries for the purpose or with the effect of
evading any law or regulation applicable to the institution. This restriction is
designed to prevent the use of holding company affiliates to evade requirements
of the SLHCA that were enacted to protect the holding company's savings
institution subsidiaries. A unitary thrift holding company, that is, a holding
company that owns only one insured institution whose subsidiary institution
satisfies the qualified thrift lender test (discussed below), is not restricted
to any statutorily prescribed list of permissible
11
activities, and the SLHCA and the FICG impose no limits on direct or indirect
non-savings institution subsidiary operations.
The SLHCA and the FICG make it unlawful for any savings and loan holding
company, directly or indirectly, or through one or more subsidiaries or one or
more transactions, to acquire control of another savings association or another
savings and loan holding company without prior approval from the OTS and the
Georgia Department, respectively. An acquisition by merger, consolidation or
purchase of assets of such an institution or holding company or of substantially
all of the assets of such an institution or holding company is also prohibited
without prior OTS or Georgia Department approval. When considering an
application for such an acquisition, the OTS and the Georgia Department take
into consideration the financial and managerial resources and future prospects
of the prospective acquiring company and the institution involved. This includes
consideration of the competence, experience and integrity of the officers,
directors and principal shareholders of the acquiring company and savings
institution. In addition, the OTS and the Georgia Department consider the effect
of the acquisition on the institution, the insurance risk to the Savings
Association Insurance Fund ("SAIF") and the convenience and needs of the
community to be served.
The OTS may not approve an acquisition that would result in the formation of
certain types of interstate banking networks. The OTS is precluded from
approving an acquisition that would result in the formation of a holding company
controlling savings institutions in more than one state unless the acquiring
company or one of its savings institution subsidiaries is authorized to acquire
control of an institution or to operate an office in the additional state
pursuant to a supervisory acquisition authorized under Section 13(k) of the
Federal Deposit Insurance Act (the "FDIA") or unless the statutes of the state
in which the institution to be acquired is located permits such an acquisition.
Savings and loan holding companies are generally allowed to acquire or to
retain as much as 5% of the voting shares of a savings institution or savings
and loan holding company without regulatory approval.
BANK REGULATION
GENERAL. The Bank is a federal savings bank organized under the laws of the
United States and subject to examination by the OTS. The OTS regulates all areas
of the Bank's banking operations including reserves, lending, mergers, payment
of dividends, interest rates, establishment of branches and other aspects of
operations. OTS regulations generally provide that federal savings banks must be
examined no less frequently than every 12 months, unless the federal savings
bank (i) has assets of less than $250 million, (ii) is well capitalized, (iii)
was found to be well managed and its composite condition was found to be
outstanding (or good, if the bank had total assets of not more than $100
million) during its last examination, (iv) is not subject to a formal
enforcement proceeding or an order from the FDIC or another banking agency and
(v) has not undergone a change of control during the previous 12-month period.
Federal savings banks must be examined no less frequently than every 18 months.
The Bank also is subject to assessments by the OTS to cover the costs of such
examinations.
The Bank is also insured and regulated by the FDIC. The major functions of
the FDIC with respect to insured federal savings banks include paying certain
depositors in an amount limited by law in the event an insured bank is closed
without adequately providing for payment of certain claims of depositors and
preventing the continuance or development of unsound and unsafe banking
practices.
Subsidiary institutions of a savings and loan holding company, such as the
Bank, are subject to certain restrictions imposed by the Federal Reserve Act,
and are implemented by HOLA and OTS regulations, on any extension of credit to
the holding company or any of its subsidiaries, on investment in the stock or
other securities thereof and on the taking of such stock or securities as
collateral for loans to any borrower. Such restrictions and regulations are
discussed more fully below. In addition, a holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit or provision of any property or services.
12
CAPITAL REQUIREMENTS. OTS regulations require that federal savings banks
maintain (i) "tangible capital" in an amount of not less than 1.5% of adjusted
total assets, (ii) "core capital" in an amount not less than 3.0% of adjusted
total assets and (iii) a level of risk-based capital equal to 8.0% of
risk-weighted assets. Under OTS regulations, the term "core capital" generally
includes common stockholders' equity, noncumulative perpetual preferred stock
and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries less unidentifiable intangible assets (other than
certain amounts of supervisory goodwill) and certain investments in certain
subsidiaries plus 90% of the fair market value of readily marketable purchased
mortgage servicing rights ("PMSRs") and purchased credit card relationships
(subject to certain conditions). "Tangible capital" generally is defined as core
capital minus intangible assets and investments in certain subsidiaries and does
not include PMSRs. Most banks are required to maintain a "minimum-leverage"
ratio related to core capital of at least 4.0% to 5.0% of adjusted total assets.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 200% (again depending upon the nature of the asset) and (iii)
the resulting amounts are added together and constitute total risk-weighted
assets. "Total capital," for purposes of the risk-based capital requirement
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock, subordinated debt and general loan
and lease loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of 4.0%.
OTS regulations have been amended to include an interest-rate risk component
to the risk-based capital requirement. Under this regulation, an institution is
considered to have excess interest rate risk if, based upon a 200 basis point
change in market interest rates, the market value of an institution's capital
changes by more than 2.0%. This new requirement is not expected to have any
material effect on the ability of the Bank to meet the risk-based capital
requirement. The OTS also revised its risk-based capital standards to ensure
that its standards provide adequately for concentration of credit risk, risk
from nontraditional activities and actual performance and expected risk of loss
on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
Additionally, the Georgia Department requires that savings and loan holding
companies, such as the Company, must maintain a 5.0% Tier 1 capital ratio on a
consolidated basis. As of December 31, 1998, the Company's Tier 1 capital ratio
was 14.44%.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") imposes a regulatory matrix which requires
the federal banking agencies, which include the OTS, the FDIC, the Office of the
Comptroller of Currency and the Federal Reserve Board, to take prompt corrective
action to deal with depository institutions that fail to meet their minimum
capital requirements or are otherwise in a troubled condition. The prompt
corrective action provisions require undercapitalized institutions to become
subject to an increasingly stringent array of restrictions, requirements and
prohibitions, as their capital levels deteriorate and supervisory problems
mount. Should these corrective measures prove unsuccessful in recapitalizing the
institution and correcting its problems, FDICIA mandates that the institution be
placed in receivership.
13
Pursuant to regulations promulgated under FDICIA, the corrective actions
that the banking agencies either must or may take are tied primarily to an
institution's capital levels. In accordance with the framework adopted by
FDICIA, the banking agencies have developed a classification system, pursuant to
which all banks and thrifts will be placed into one of five categories: well
capitalized institutions, adequately capitalized institutions, undercapitalized
institutions, significantly undercapitalized institutions and critically
undercapitalized institutions. The capital thresholds established for each of
the categories are as follows:
TIER 1
RISK-BASED RISK-BASED
CAPITAL CATEGORY LEVERAGE RATIO CAPITAL CAPITAL
- --------------------------------------------- ----------------- ----------------- -----------------
Well Capitalized............................. 5.0% or more 10.0% or more 6.0% or more
Adequately Capitalized....................... 4.0% or more 8.0% or more 4.0% or more
Undercapitalized............................. Less than 4.0% Less than 8.0% Less than 4.0%
Significantly Undercapitalized............... Less than 3.0% Less than 6.0% Less than 3.0%
Critically Undercapitalized.................. 2.0% or less -- --
tangible equity
The undercapitalized, significantly undercapitalized and critically
undercapitalized categories are successively inclusive; therefore, a critically
undercapitalized institution would also be an undercapitalized institution and a
significantly undercapitalized institution. This overlap ensures that the
remedies and restrictions prescribed for undercapitalized institutions will also
apply to institutions in the lowest two categories.
The downgrading of an institution's category is automatic in two situations:
(i) whenever an otherwise well capitalized institution is subject to any written
capital order or directive and (ii) where an undercapitalized institution fails
to submit or implement a capital restoration plan or has its plan disapproved.
The federal banking agencies may treat institutions with applicable ratios in
the well capitalized, adequately capitalized and undercapitalized categories as
if they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels. FDICIA prohibits
all insured institutions regardless of their level of capitalization from paying
any dividend or making any other kind of capital distribution or paying any
management fee to any controlling person if following the payment or
distribution, the institution would be undercapitalized. While the prompt
corrective action provisions of FDICIA contain no requirements or restrictions
aimed specifically at adequately capitalized institutions, other provisions of
FDICIA and the agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well capitalized. For example, a
depository institution that is not well capitalized is prohibited from accepting
deposits through a deposit broker. However, an adequately capitalized
institution can apply for a waiver to accept brokered deposits. Institutions
that receive a waiver are subject to limits on the rates of interest they may
pay on brokered deposits.
CAPITAL DISTRIBUTIONS. An OTS rule imposes limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers). Under the current rule, a savings association is
classified based on its level of regulatory capital both before and after giving
effect to a proposed capital distribution. Under a proposed rule, the OTS would
conform its three classifications to the five capital classifications set forth
under the prompt corrective action regulations. Under the proposal, institutions
that are at least adequately capitalized would still be required to provide
prior notice. Well capitalized institutions could make capital distributions
without prior regulatory approval in specified amounts in any calendar year.
Under current OTS regulations, a savings association that both before and
after a proposed capital distribution has net capital equal to or in excess of
its capital requirements may, subject to any otherwise applicable statutory or
regulatory requirements or agreements entered into with the regulators, make
capital distributions in any calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (i.e., the percentage by which the
14
association's capital-to-assets ratio exceeds the ratio of its fully phased-in
capital requirement to its assets) at the beginning of the calendar year. No
regulatory approval of the capital distribution is required, but prior notice
must be given to the OTS. An institution that either before or after a proposed
capital distribution fails to meet its then applicable minimum capital
requirement or that has been notified that it needs more than normal supervision
may not make any capital distributions without the prior written approval of the
OTS. In addition, the OTS may prohibit a proposed capital distribution, which
would otherwise be permitted by OTS regulations, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
LIQUIDITY. Under OTS regulations, savings associations must maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) in each calendar quarter of not
less than 4% of: (i) the amount of its liquidity base at the end of the
preceding calendar quarter or (ii) the average daily balance of its liquidity
base during the preceding quarter. The average daily balance of either liquid
assets or liquidity base in a quarter is calculated by adding the respective
balance as of the close of each business day in a quarter and, for any
non-business day, as of the close of the nearest preceding business day, and
dividing the total by the number of days in the quarter. The OTS may, to the
extent and under conditions it may prescribe, permit a savings association to
reduce its liquid assets below the minimum amount to meet withdrawals or pay
obligations. In addition, the OTS may suspend part or all of the minimum
liquidity requirements whenever it determines that conditions of national
emergency or unusual economic stress exist. Any such suspension, unless sooner
terminated by its terms or by the OTS, shall terminate after 90 days, but the
OTS may again suspend part or all of such requirement at any time. Savings
institutions also are required to maintain short-term liquid assets to satisfy
Federal Reserve Board requirements.
EQUITY INVESTMENTS. The OTS has revised its risk-based capital regulation
to modify the treatment of certain equity investments and to clarify the
treatment of other equity investments. Equity investments that are permissible
for both savings banks and national banks will no longer be deducted from
savings associations' calculations of total capital over a five-year period.
Instead, permissible equity investments will be placed in the 100% risk-weight
category, mirroring the capital treatment prescribed for those investments when
made by national banks under the regulations of the OCC. Equity investments held
by savings associations that are not permissible for national banks must still
be deducted from assets and total capital.
QUALIFIED THRIFT LENDER REQUIREMENT. A federal savings bank is deemed to be
a "qualified thrift lender" ("QTL") if: (i) the savings association qualifies as
a domestic building and loan association, as such term is defined in section
7701(a)(19) of the Internal Revenue Code of 1986, as amended or (ii) the savings
association's qualified thrift investments equal or exceed 65% of its "portfolio
assets" on a monthly average basis in nine out of every 12 months. Qualified
thrift investments generally consist of (i) various housing related loans and
investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), (ii) certain obligations of the FDIC and (iii) shares of stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% in
the aggregate of portfolio assets: (i) 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination, (ii)
investments in securities of a service corporation that derives at least 80% of
its income from residential housing finance, (iii) 200% of loans and investments
made to acquire, develop or construct starter homes or homes in credit needy
areas (subject to certain conditions), (iv) loans for the purchase or
construction of churches, schools, nursing homes and hospitals and (v) consumer
loans. For purposes of the QTL test, the term "portfolio assets" means the
savings institution's total assets minus goodwill and other intangible assets,
the value of property used by the savings institution to conduct its business
and liquid assets held by the savings institution in an amount up to 20% of its
total assets.
15
OTS regulations provide that any savings association that fails to meet the
definition of a QTL must either convert to a national bank charter or limit its
future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national banks.
Further, within one year of the loss of QTL status, a holding company of a
savings association that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL.
LOANS TO ONE BORROWER LIMITATIONS. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower in
amounts up to 15% of their unimpaired capital and surplus, plus an additional
10% of capital and surplus for loans secured by readily marketable collateral.
HOLA provides exceptions under which a savings association may make loans to one
borrower in excess of the generally applicable national bank limits. A savings
association may make loans to one borrower in excess of such limits under the
following circumstances: (i) for any purpose, in any amount not to exceed
$500,000 or (ii) to develop domestic residential housing units, in an amount not
to exceed the lesser of $30 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided other conditions are
satisfied. The Federal Institutions Reform, Recovery, and Enforcement Act of
1989 provided that a savings association could make loans to one borrower to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith in amounts up to 50% of the savings association's
unimpaired capital and unimpaired surplus. The OTS, however, has modified this
standard by limiting loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital and surplus. That
rule provides, however, that purchase money mortgages received by a savings
association to finance the sale of such real property do not constitute "loans"
(provided no new funds are advanced and the savings association is not placed in
a more detrimental position holding the note than holding the real estate) and,
therefore, are not subject to the loans to one borrower limitations.
COMMERCIAL REAL PROPERTY LOANS. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to an
amount not in excess of 20% of the savings association's assets, and amounts in
excess of 10% of such total assets must be devoted to small business real
property loans.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA")
and the implementing OTS regulations, federal savings banks have a continuing
and affirmative obligation to help meet the credit needs of their local
communities, including low and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. The CRA requires the boards of
directors of financial institutions, such as the Bank, to adopt a CRA statement
for each assessment area that, among other things, describes its efforts to help
meet community credit needs and the specific types of credit that the
institution is willing to extend. The regulations promulgated pursuant to CRA
contain three evaluation tests: (i) a lending test which will compare the
institution's market share of loans in low- and moderate-income areas to its
market share of loans in its entire service area and the percentage of a bank's
outstanding loans to low- and moderate-income areas or individuals, (ii) a
services test which will evaluate the provision of services that promote the
availability of credit to low-and moderate-income areas and (iii) an investment
test, which will evaluate an institution's record of investments in
organizations designed to foster community development, small- and
minority-owned businesses and affordable housing lending, including state and
local government housing or revenue bonds.
FAIR LENDING. Congress and various federal agencies (including, in addition
to the bank regulatory agencies, the Department of Housing and Urban
Development, the FTC and the Department of Justice) (collectively the "Federal
Agencies") responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers are
experiencing discrimination in their efforts to obtain loans. In recent years,
the Department of Justice has filed suit against financial
16
institutions that it determined had discriminated, seeking fines and restitution
for borrowers who allegedly suffered from discriminatory practices. Most, if not
all, of these suits have been settled (some for substantial sums) without a full
adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified: (i)
overt evidence of discrimination, when a tender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person and (iii) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their face and
are applied equally, unless the practice can be justified on the basis of
business necessity.
FDIC INSURANCE ASSESSMENTS. Federal deposit insurance is required for all
federally chartered savings associations. Deposits at the Bank are insured to a
maximum of $100,000 for each depositor by the SAIF. As a SAIF-insured
institution, the Bank is subject to regulation and supervision by the FDIC, to
the extent deemed necessary by the FDIC to ensure the safety and soundness of
the SAIF. The FDIC is entitled to have access to reports of examination of the
Bank made by the OTS and all reports of condition filed by the Bank with the
OTS. The FDIC also may require the Bank to file such additional reports as it
determines to be advisable for insurance purposes. Additionally, the FDIC may
determine by regulation or order that any specific activity poses a serious
threat to the SAIF and that no SAIF member may engage in the activity directly.
Insurance premiums are paid in semiannual assessments. Under a risk-based
assessment system, the FDIC is required to calculate on a semi-annual basis a
savings association's semiannual assessment based on (i) the probability that
the insurance fund will incur a loss with respect to the institution (taking
into account the institution's asset and liability concentration), (ii) the
potential magnitude of any such loss and (iii) the revenue and reserve needs of
the insurance fund. The semiannual assessment imposed on the Bank may increase
depending on the SAIF revenue and expense levels, and the risk classification
applied to the Bank.
The deposit insurance assessment rate charged to each institution depends on
the assessment risk classification assigned to each institution. Under the
risk-classification system, each SAIF member is assigned to one of three capital
groups: "well capitalized," "adequately capitalized" or "less than adequately
capitalized," as such terms are defined under the OTS's prompt corrective action
regulation (discussed above), except that "less than adequately capitalized"
includes any institution that is not well capitalized or adequately capitalized.
Within each capital group, institutions are assigned to one of three supervisory
subgroups--"healthy" (institutions that are financially sound with only a few
minor weaknesses), "supervisory concern" (institutions with weaknesses which, if
not corrected could result in significant deterioration of the institution and
increased risk to the SAIF) or "substantial supervisory concern" (institutions
that pose a substantial probability of loss to the SAIF unless corrective action
is taken). The FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and supervisory
subgroup classification.
Historically, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF"). Deposit
insurance premiums were set to facilitate each fund achieving its designated
reserve ratios. As each fund achieves its designated reserve ratio, however, the
FDIC has the authority to lower the premium assessments for that fund to a rate
that would be sufficient to maintain the designated reserve ratio. In August
1995, the FDIC determined that the BIF had achieved its designated reserve ratio
and approved lower BIF premium rates for deposit insurance by the BIF for all
17
but the riskiest institutions. On November 14, 1995, the FDIC determined that
BIF deposit insurance premiums for well capitalized banks would be further
reduced to the then-statutory minimum of $2,000 per institution per year,
effective January 1, 1996. Because the SAIF remained significantly below its
designated reserve ratio, insurance premiums for assessable SAIF deposits were
not reduced in either FDIC action.
The financial condition of the SAIF resulted in the adoption of the Deposit
Insurance Funds Act of 1996 ("DIFA"), which was enacted on September 30, 1996 as
part of the Omnibus Consolidated Appropriations Act. Under DIFA, a special
one-time assessment of 65.7 cents per $100 of assessable SAIF deposits was
collected on November 27, 1996 and applied retroactively to SAIF deposits as of
March 31, 1995. DIFA provides that special assessments are deductible under
Section 162 of the Internal Revenue Code in the year in which the assessment is
paid. After collection of the special assessment, the SAIF achieved its
designated reserve ratio and SAIF premium rates became the same as BIF rates.
DIFA further provided that BIF and SAIF were to be merged, creating the "Deposit
Insurance Fund," on January 1, 1999, provided that bank and savings association
charters were combined by that date. The Treasury Department has submitted a
report to Congress on the development of a common charter for all insured
depository institutions. See "--Elimination of Federal Savings Association
Charter."
DIFA further assesses premiums for Financing Corporation Bond debt service
("FICO"). Beginning January 1, 1997, FICO premiums for BIF and SAIF became 1.3
and 6.4 basis points, respectively. Full pro rata sharing of FICO will begin no
later than January 1, 2000.
Effective January 1, 1997, SAIF members had the same risk-based assessment
schedule as BIF members, which is 0 to 27 cents per $100 of deposits. FICO
assessments of 1.3 cents for BIF deposits and 6.4 cents per $100 of deposits for
SAIF deposits were added to the BIF-assessable base and SAIF assessable base,
respectively, until December 31, 1999. Thereafter, approximately 2.4 cents per
$100 of deposits will be added to each regular assessment for all insured
depositors, thereby achieving full pro rata FICO sharing.
Insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the savings association has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings association,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal Housing Finance
Board (the "FHFB"). The FHLBs provide a central credit facility for member
savings associations. Collateral is required. The maximum amount that the FHLB
of Atlanta will advance fluctuates from time to time in accordance with changes
in policies of the FHFB and the FHLB of Atlanta, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings association may obtain will be restricted
in the event the institution fails to constitute a QTL.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board has adopted regulations
that require savings associations to maintain non-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). These
reserves may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the Bank's interest-earning
assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Collateral is required. Federal Reserve Board
regulations, however, require savings associations to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
18
TRANSACTIONS WITH AFFILIATES RESTRICTIONS. Transactions engaged in by a
savings association or one of its subsidiaries with affiliates of the savings
association generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same manner
and to the same extent as such restrictions apply to transactions engaged in by
a member bank or one of its subsidiaries with affiliates of the member bank.
Section 23A of the Federal Reserve Act imposes both quantitative and qualitative
restrictions on transactions engaged in by a member bank or one of its
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things, that all transactions with affiliates be on terms
substantially the same, and at least as favorable to the member bank or its
subsidiary, as the terms that would apply to, or would be offered in, a
comparable transaction with an unaffiliated party. Exemptions from, and waivers
of, the provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve Board. The HOLA and OTS regulations
promulgated thereunder contain other restrictions on loans and extension of
credit to affiliates, and the OTS is authorized to impose additional
restrictions on transactions with affiliates if it determines such restrictions
are necessary to ensure the safety and soundness of any savings association.
Current OTS regulations are similar to Sections 23A and 23B of the Federal
Reserve Act.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ELIMINATION OF FEDERAL SAVINGS ASSOCIATION CHARTER
In recent years, the Congress has considered legislation that would
eliminate the federal savings association charter. If such legislation is
enacted, the Bank likely would be required to convert its federal savings bank
charter to either a national bank charter or to a state depository institution
charter and the Company would again become a bank holding company subject to
regulation by the Federal Reserve Board and the Georgia Department. Congress has
also considered various legislative proposals that would result in the
restructuring of federal regulatory oversight, including, for example,
consolidation of the OTS into another agency, or creation of a new Federal
banking agency to replace the various such agencies which presently exist. The
Bank is unable to predict whether such legislation will be enacted or, if
enacted, whether the federal savings bank charter will be eliminated.
ITEM 2. PROPERTIES
The Company leases 7,480 square feet of office space for its headquarters
and those of the Bank at 950 North Point Parkway, Suite 350, Alpharetta, Georgia
30005. The office space is subject to a lease that expires in January 31, 2005.
The Company has signed a new lease for approximately 19,615 square feet of
office space for a new headquarters location located at Royal Centre Three,
Suite 100, 11475 Great Oaks Way, Alpharetta, Georgia 30022. We plan to move our
offices to this location in the summer of 1999.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing, is a
party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information regarding the quarterly high and low sales prices for the
Company's Common Stock, the number of record shareholders and the Company's
dividend policy is contained in the Company's Annual Report to Shareholders for
the year ended December 31, 1998 under the headings "Price Range of Common
Stock" and "Dividends" and is incorporated herein by reference.
On February 10, 1999, the Company consummated a secondary public offering in
which it issued 2,430,000 shares of Common Stock at an aggregate offering price
of $111,780,000, or $46.00 per share, in a firm commitment underwritten offering
managed by Bear, Stearns & Co., Inc., Morgan Keegan & Company, Inc., Raymond
James & Associates, Inc. and Kelton International Ltd., who received an
underwriting discount of $6,147,900 or $2.53 per share. To date, we have used
the net proceeds of the offering to purchase $84 million of loans and have
applied approximately $500,000 to marketing expenses that we expect to total
approximately $3.6 million for 1999. Pending the application of the remaining
net proceeds, we have invested them in short-term, investment grade,
interest-bearing securities.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Selected Financial Data" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14 are included in the Company's
Annual Report to Shareholders for the year ended December 31, 1998 and are
hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the headings "Election of Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the heading "Compensation of Executive Officers" and "Historical
Information Regarding Repricing, Replacement or Cancellation and Regrant of
Options" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the heading "Security Ownership of Principal Shareholders and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the headings "Certain Transactions" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years ended December 31, 1998 and 1997 and the Period from
February 20, 1996 (Date of Incorporation) to December 31, 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the Period
from February 20, 1996 (Date of Incorporation) to December 31, 1996 and
for the Years ended December 31, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years ended December 31,
1998 and 1997 and the Period from February 20, 1996 (Date of
Incorporation) to December 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Financial Data (unaudited)
(b) Reports on Form 8-K:
None
21
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Bylaws.(1)
3.3 Amendments to the Bylaws adopted April 22, 1997.(1)
4.1 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Company's Articles of Incorporation and
Bylaws governing the rights of holders of securities of the Company.
10.1 Amended and Restated Stock Purchase Agreement among the Company and First Alliance/Premier
Bancshares, Inc. dated as of December 18, 1996, as amended by Amendment No. 1 dated as of
February 25, 1997 and by Amendment No. 2 dated as of May 31, 1997.(1)
10.2 Lease Agreement dated as of March 17, 1999 between the Bank and Opus South Corporation.
10.3* 1996 Stock Incentive Plan(1), as amended as of March 19, 1998(2) and as of March 23, 1999.
10.4 Order for Services dated as of September 17, 1998 between the Bank and NCR Corporation.
10.5* Memorandum dated June 11, 1996 from T. Stephen Johnson to Donald S. Shapleigh.(1)
10.6 [Reserved]
10.7 Services Agreement dated as of August 21, 1996 by and between the Company and BISYS, Inc.,
with related addenda.(1)
10.8 BISYS Standard Services Price List and Special Services Price List, dated December 1, 1991.(1)
10.9 Lease Agreement dated as of September 15, 1997 between the Company and Windward Forest
Partners, LLC(2)
10.10++ Services Agreement dated as of October 31, 1997 between the Company and CheckFree
Corporation.(2)
10.11++ Services Agreement dated as of September 26, 1997 between the Company and Edify
Corporation.(2)
10.12++ Services Agreement dated as of June 16, 1997 between the Company and Nova Financial Corp.(2)
10.13++ Additional Service Agreement dated March 13, 1997 between the Company and BISYS, Inc. for
Total Access Banking and End User Software License Agreement for Total Access Banking.(2)
10.14++ Brokerage Service Agreement dated November 21, 1997 between the Company and UVEST Investment
Services, Inc.(2)
13.1 The following portions of the Company's 1998 Annual Report to Shareholders that have been
incorporated by reference herein:
Price Range of Common Stock
Dividends
22
EXHIBIT
NUMBER EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Financial Statements, the Notes thereto and the Independent Auditors' Report
thereon
Quarterly Financial Data
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule for the fiscal year ended December 31, 1998 (SEC use only).
- ------------------------
* Indicates a management compensation plan or agreement.
++ Confidential portions have been redacted pursuant to a Confidential
Treatment Request submitted in accordance with regulations promulgated under
the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Registration Statement on Form S-1 (Regis. No. 333-23717).
(2) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 0-22361).
(d) Financial Statements
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not
required under the related instructions or are inapplicable and have
therefore been omitted.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 23, 1999.
NET.B@NK, INC.
By: /s/ D.R. GRIMES
-----------------------------------------
D.R. Grimes
Vice Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 23, 1999.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ T. STEPHEN JOHNSON
- ------------------------------ Chairman of the Board
T. Stephen Johnson
/s/ D.R. GRIMES
- ------------------------------ Vice Chairman and Chief
D.R. Grimes Executive Officer*
/s/ DONALD S. SHAPLEIGH, JR.
- ------------------------------ President, Chief Operating
Donald S. Shapleigh, Jr. Officer and Director
/s/ ROBERT E. BOWERS
- ------------------------------ Chief Financial Officer
Robert E. Bowers and Director**
/s/ WARD H. CLEGG
- ------------------------------ Director
Ward H. Clegg
/s/ J. STEPHEN HEARD
- ------------------------------ Director
J. Stephen Heard
- ------------------------------ Director
Robin C. Kelton
/s/ THOMAS H. MULLER, JR.
- ------------------------------ Director
Thomas H. Muller, Jr.
/s/ W. JAMES STOKES
- ------------------------------ Director
W. James Stokes
/s/ MACK I. WHITTLE, JR.
- ------------------------------ Director
Mack I. Whittle, Jr.
- ------------------------
* Principal Executive Officer
** Principal Accounting and Financial Officer
24